Some Generic Drugs Are Not Making It Onto Part D Formularies. A New Bill Could Fix That.

While the free-market design of Medicare Part D, Medicare’s prescription drug benefit, continues to deliver low premiums and numerous choices for millions of beneficiaries, the program has not yet met its full potential to encourage patients and their doctors to choose generics and biosimilars when appropriate.

Steering beneficiaries and their health care providers toward lower-cost drugs carries significant benefits for taxpayers: the less the Part D program and its plan sponsors spend on drugs, the lower premiums are for patients and the less taxpayers fork over in program subsidies. When properly balanced with policies that encourage new drug discoveries (and therefore longer-run taxpayer savings), the result is a system that provides both innovation and access. 

One problem facing Part D beneficiaries and taxpayers is the cost of so-called first generics on Part D formularies. These drugs, the first competitor to a brand-name drug approved by the Food and Drug Administration (FDA), are increasingly being covered on brand tiers (which have higher cost-sharing requirements for patients) rather than generic tiers, according to a September 2019 study.

Experts have cited a number of reasons why first generics are struggling to make it onto generic tiers, but one issue seems to be the unintended consequences of 2016 guidance from the Centers for Medicare and Medicaid Services (CMS).

In April 2016, CMS said it would allow Part D prescription drug plan (PDP) sponsors to create a “non-preferred drug tier” that includes both brand-name and generic drugs starting in 2017 - a change from just requiring a “non-preferred brand tier.” CMS said that PDP sponsors could choose between a “non-preferred drug” tier and a “non-preferred brand” tier, but not both. In their announcement, CMS acknowledged that “it is our understanding that the new non-preferred drug tier likely will contain a greater proportion of generic drug products than the current non-preferred brand tier composition.”

Non-preferred tiers typically have higher cost-sharing requirements for patients than either the preferred brand-name tier or the generic tier, so the inclusion of more generic drugs on the non-preferred tier discourages patients and doctors from choosing generic drugs. While the CMS guidance may have been intended to offer additional flexibility to PDP sponsors in customizing their plans, an unforeseen development appears to have been less generic utilization than desired for the Part D program.

New legislation in Congress provides a starting point for discussion over tackling the problem. Last month, Reps. David McKinley (R-WV) and Ann Kuster (D-NH) introduced H.R. 4913, the Ensuring Access to Lower-Cost Medicines for Seniors Act.

This bill effectively reverses the 2016 CMS guidance by creating a cost-sharing tier “that only includes covered generic drugs and covered biosimilar biological products.” It would also create a specialty generic cost-sharing tier for more expensive generic drugs and biosimilars.

Additional tiers generally mean more flexibility for PDP sponsors to steer their customers to lower-cost drugs, which in turn would enable sponsors to create plans with either lower premiums, coverage tailored to certain populations, or both.

Regulators should be careful, though, not to use these additional tiers to straitjacket PDP sponsors into overly specific tier requirements. Part D has been successful in part because private insurers have had considerable flexibility to design plans that are best suited to their customers’ needs and wants. In fact, a way to improve this part of the legislation would be to use “carrots” for PDP sponsors instead of the “stick” of required tiers. One way to construct this “carrot” would be to allow plans that have specialty generic tiers to offer more than three prescription drug plans per region. Rep. Tom Reed (R-NY) and House Energy and Commerce Committee Republicans offered amendments to H.R. 3 that utilize this incentive, allowing PDP sponsors to offer up to six PDPs in a region if they pass drug rebates on to customers at the point of sale. Similarly, lawmakers could amend H.R. 4913 by allowing PDP sponsors who have a specialty generic tier to offer four, five, or six PDPs in a region, instead of three.

While H.R. 4913 makes several smart, measured reforms to the Part D program, lawmakers should carefully examine one portion of the bill as written. Requiring PDP sponsors to include almost all generics and biosimilars may unintentionally create a new “protected class” of drugs. This protected class could reduce sponsors’ negotiating power as they create their plans, and in turn compel them to increase premiums. While there should be a fair and level playing field for brand-name and generic drugs in the Part D program, price competition is a better way to lower costs for patients than requiring the inclusion of a large class of drugs.

Overall, the Part D program works because it relies on the private sector to design the best plans for patients and aggressively compete for market share. The Ensuring Access to Lower-Cost Medicines for Seniors Act would reverse some well-intentioned but misplaced Part D guidance from CMS, and create additional tiering flexibility for PDP sponsors. This ultimately holds the promise of lowering costs for both patients and taxpayers, and Congress should thoughtfully consider this legislation.